Joe Weisthnal notes that our recovery has been better than other financial crisis recessions.

Four things about the chart. First, I’d note as a matter of the empirical research that “financial crisis” isn’t a coherent unit of measurement for these purposes. If Finland was going to have a recession three-times worse than the United States, it would also have a “financial crisis” at some point. But that doesn’t mean the recessions are identical. This idea that financial crises creates long recessions when long recessions really create financial crises is the weak part of the whole Rogoff-Reinhart argument. So I’m not sure these are equal starting points for a comparison.

Second: Joe argues that what saved us was bailing out the financial sector with a blank-check. Maybe, but I’d need to see more. What has the financial sector done to boost the real economy during this time period? The financial sector shutdown in 2009, even after the bailouts. The government became the de facto financial sector during the worst of the crisis and in its aftermath. A more generous or more harsh bailout wouldn’t have changed this fact.

The biggest threat to the real economy would have been the shutdown of the commercial paper market, which the Federal Reserve backstopped and ran by itself through emergency lending facilities (but only after TARP had passed). The private student loan market collapsed, which had to be taken up by the public sector (a relationship that became permanent in Obamacare). FHA basically took over the housing market, saving it when the financial sector disappeared. The private market was incapable of generating funding to save the auto industry, which the government had to do. So, ummm, thanks financial sector?

(To go further, while the best and brightest of the financial sector were busy gambling and not beating the S&P 500, the United States provided financing for long-term R&D investments in things like energy during the recession. As root_e notes, what value does a private capital market even provide at this point?)

Third: The real credit for that graphic almost certainly goes to House Republicans, which wouldn’t take yes for an answer when it came to prematurely getting to austerity. Geithner, as Zachary Goldfarb reported in the Washington Post, famously had this exchange with Christina Romer:

By early last year [in 2010], Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009. [....]

Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

“There was this move to exit fiscal stimulus a lot sooner than we should have, and we’ve been playing catch-up ever since,” Romer said in an interview.

If running large fiscal deficits are what is keeping the economy afloat as it delevers, Geithner’s choice to turn to the long-term would have been a disaster if the Republicans would have met him halfway.

Fourth: The other credit goes to Ben Bernanke, who hasn’t taken his foot off the pedal (but should be pushing more). It’s worth noting that, besides the destruction it has put on families and communities, the lack of a serious response on housing has put monetary policy in check. Experts in monetary policy have noted how the Federal Reserve has pushed for the lowest mortgage rates in modern history only to find that Treasury had no plan in place to allow underwater mortgages to refinance. By the time they did put programs in place, in Spring 2012, the way it was setup and the lack of public refinancing means that a huge amount of the monetary stimulus is going to banks’ profits.

The first is the FHA Short Refi program. It is an $8.1 billion dollar line of credit allocated through TARP designed to “enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth.” According to the latest SIGTARP numbers, it has modified 1,772 mortgages and allocated $57 million dollars for potential future claims as well as expenses. Which means it has spent less than 1 percent of its funds, even though those funds are allocated for this purpose. I’ve noted it would be perfectly legal for Treasury to use this fund to provide up to around $100 billion dollars of funding for a HOLC program, like the one Senator Merkley has proposed, and it can be done without going to Congress.

The second is the Public-Private Investment Program for Legacy Assets, also referred to as PPIP or the “Geithner Plan.” Here Geithner proposed a program that would have private hedge funds team up with the government to purchase one trillion dollars of “legacy assets,” or the toxic waste of bad, illiquid mortgage-backed securities on the Too Big To Fail banks’ balance sheets. The hedge funds would provide some money and expertise as well as take the first losses, with the FDIC’s fund providing the leverage and eating all the remaining losses.

This program was correctly identified as the public writing a “put option” on those debts. As such, the public insurance would cause the hedge funds to overbid for the assets, which would help get them off the balance-sheets of the banks.

PPIP was killed quickly for a number of reasons, including the fact that this subsidy wasn’t enough for the banks’ balance sheet, but it is worth noting two things. The core instinct was to put programs in place in 2009 to bid up, rather than write down, bad mortgage debt. Instead of trying to get those assets written down to a manageable level quickly, public money and power was utilized towards trying to keep that value up. That’s the opposite of what one should do in a balance-sheet recession. And the recent evidence all points to the prolonged recession being a result of a large debt overhang.

The other is the contrast between creativity and energy shown in the pursuit of getting the public to take over the garbage loans of the TBTF banks, and the lack of interest in taking already allocated money for housing relief and using it towards its stated goals. The FDIC fund isn’t meant for this kind of gambling; it reflects a form of social insurance banks and depositors pay to prevent panics. Meanwhile the government isn’t even bothering to spend the money already allocated through programs like FHA Short Refi, much less using them in creative ways. If only half that energy was put into motion on behalf of debtors and homeowners.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

I view this as 1. ignorance on the part of the players (as to what was occurring), 2. betrayal of the President by the Democrats (who showed lack of respect for Obama and a willingness to continue porcine business as usual even in the midst of a crisis), 3. betrayal of the President by the Republicans (nuff been said) and 4. betrayal of the President by the Banks (that is, their Boards and Execs.) Everyone was 100% focused on their own self-interest to the total exclusion of all else. In some respects one cannot blame the parties for acting purely in their own self-interest as they apparently cared nothing for the country as long as they individually profited, but to the extent that representations were made to the President which led him to believe that they would act in the best interests of the country, he was betrayed.

Most important I came go along with, if I stretch to include biggest screw-up.

A great job guiding us out of the recession is a bit harder to swallow, but I guess he is if you’re one of the banks that caused this crisis. The rest of us in the real world are still in a recession/depression with no end in sight (or is this just the “new” normal?)

Now as for his tenure at the Fed, disaster is the word that comes to mind.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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